Seen and Unseen Cost of Patents

January 29, 2009 1:26 PM by Jeffrey Tucker (Archive)

[This is part 4 of an ongoing live blog of Against Intellectual Monopoly]

Drugs patents took it on the chin a few years ago, when major drug companies refused to sell cheap AIDS drugs in Africa. Presuming the drugs work, countless lives might have been saved. But the desire to protect the high price on the patented drug--despite the low marginal cost for producing additional units--trumped the humanitarian impulse to save lives. The large drug companies refused to budge, despite protests from all over the world.

Defenders of the drug companies say: well, sure it is cheap to produce mass quantities of drugs after they have been developed. But the costs of getting there are sky high. If companies can't charge high prices, they won't develop the drugs in the first place.

Boldine and Levine, in chapter four, offer an interesting response to this claim but it requires a bit of thought. They point out that the drugs can still be sold profitably at vastly lower prices, in the same way that many other products can be sold profitably at low prices. Items of super high cost--think of passenger airlines or cruise ships--recoup those costs through volume sales over time. It is the same with drugs, or could be.

So why wouldn't the pharmaceutical companies budge in the African case? It is due to the fear of re-importation, that is, that the drugs would make their way back to the US and Canada and be sold at cheap prices, thereby undercutting the monopolistic price.

Why not just price discriminate? It not so easy to price discriminate in a global economy. Rather than take that risk, companies settled for not selling at all. This reflects a general principle articulated by Boldine and Levine: "Intellectual monopolists often fail to price discriminate because doing so would generate competition from their own consumers."

Think about this principle. It helps explain why large software manufacturers routinely degrade their products available to consumers while reserving their better products for the more lucrative corporate market. This is why the versions of operating systems and end-user software are dumbed down on the consumer market. The companies don't want to permit cross selling between markets, even though the costs of selling better products across markets are virtually identical. Only IP allows them to get away with this sort of behavior.

So, yes, there are some benefits to patents in the same way there are benefits to all monopolists. The Post Office benefits from the prohibition against private delivery on letters. Public school benefit by regulations on private education and mandatory funding. The electric company benefits from its statutory guarantee against competitive intrusion.

But that is not the same as saying that all groups benefit. Boldrine and Levine examine data from Total Factor Productivity in cross-national studies and show that the astounding increase in patents in the 1990s--rising more than three-fold from a stable rate in previous decades--has had no effect on increase prosperity and innovation.

Meanwhile, there are huge costs, even for those who acquire and own the patents. Oracle software, for example, spends vast resources on what can be called defensive patents. They must get them before someone else does else risk having to pay huge fees to someone else. Cross-licensing is the only way to develop software now, so the patent route has been forced on everyone. The word "thicket" is the one everyone uses. What it really amounts to is a cold war between patent holders--a patent race that is very much like an arms race. This is why Nokia own 12,000 patents and Microsoft is adding 1,000 patents a month to its arsenal. Intel's CEO spoke for many when he said he would be glad to cut patents to a tenth of its current rate provided that others did the same.

Conventional patent theory says they are necessary for generating revenue to fund research and development, and to inspire innovation. This is supposedly the economically valuable contribution of patents. Then there is the real world. A Carnegie Endowment survey of firms shows that businesses themselves report that this function of patents is mentioned as important only 6% of the time. The main reason businesses say that they want patents is enforce monopoly--preventing people from developing similar but better and cheaper products--and to prevent lawsuits.

They authors describe the result of patents as not a competitive market for innovation but an oligopolistic market structure around patent-pool mechanisms. This affects every industry, as patent battles hinder economic development. A good example is the ongoing battle over who and what can lay claim to the title "basmati" rice. A Texas company called RiceTec won a patent in 1997, infuriating Indian and Pakistani companies that have been making Basmati for hundreds of years. These companies have been fighting back with their own attempts to register patents on the rice. What this has to do with the consumer and the dinner table and the need for cheap and delicious food being made widely available is the unanswered question.

A peculiar form of patent abuse comes in the form of the submarine patent. This is a patent taken out early while the production of the product itself is delayed as long as possible. When someone else finally goes to market with a product, the patent emerges from the deep as a method of blackmailing the company that has gone to market.

Boldine and Levine explain that this tactic dates to George Seldon's patent on the "road engine" in 1895. It commanded 1.25% on the sale of every car in the US. He sold his patent for $10,000 and 20% of royalties to a syndicate in 1899. As the car actually started to make it to market, the Associated of Licensed Automobile dealers formed a cartel around the patent. The authors comment: "if you were wondering why the U.S. automobile industry developed so quickly into the oligopoly we know and hate, a fair share of the roots lie in bad 'intellectual property' legislation and the intellectual monopoly it created."

Personally, I find that revelation remarkable. More than a hundred years later, we are still paying the price for this car-cartel-creating patent. Something similar happened to airplanes, when the Wright Brothers managed to get a patent on anything resembling an airplane, despite their own meager contribution to the technology. They were so aggressive in blasting all competitors that all serious innovation in airline technology ended up taking place overseas in France.

The authors make a statement that I wish could be made more prominent, since it comports with everything I know about businesspeople and patents. It is the most common thing in the world for a businessperson who use every market-oriented skill to get a product to market: a good product at a good price that becomes the market leader. At this point, and for some odd reason, the businessperson gets confused. He thinks that it his IP that is the key to his success and ends up fighting for it with all his might, even at his own expense.

Here is the statement by Boldrine and Levine: " "Being a monopolist" is, apparently, akin to going on drugs or joining some strange religious sect. It seems to lead to a complete loss of any sense of what profitable opportunities are and of how free markets function. Monopolists, apparently, can conceive of only one way of making money, that is bullying consumers and competitors to put up or shut up. Furthermore, it also appears to mean that past mistakes have to be repeated at a larger, and ever more egregious, scale."

A clear case in point concerns the Recording Industry Association of America, which managed to make itself appear as the devil incarnate in the eyes of an entire generation of music downloaders. Another example concerns Google Print. This work of genius would have brought all the world's libraries to one central location so that users could search the books and purchase them. Wonderful! But the Authors Guild sued, and the suit has gutted Google Print as a useful tool. The dream of all educated people from the ancient world to the present--a single accessible repository of all the world's wisdom--was stopped for no good reason.

The authors conclude chapter four with a restatement of the theme: the benefits of patents are small and narrow, while the costs are large and broad. The biggest costs are the unseen ones that Bastiat speaks of. These are innovations we don't see, the products that don't come to market, the efficiencies that we never experience, the companies that don't come into existence, and the investment that would have taken place with the resources that are expended on patent acquisition and enforcement. Here are the real costs of patents, and they are incalculable.

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Comments (63)

Stephan Kinsella

"Intel's CEO spoke for many when he said he would be glad to cut patents to a tenth of its current rate provided that others did the same."

Jeff, this comment reminded me of this Patent Rights Web Poll I did a while back--I asked "Would you give up your right to sue others for patent infringement in exchange for immunity from all patent lawsuits?"

Out of over 200 respondents, 78% said YES.

Patent Rights

Would you give up your right to sue others for patent infringement in exchange for immunity from all patent lawsuits?

Yes No

Current Results

Published: January 29, 2009 2:02 PM
Justin

Jeff, to be fair, passanger airlines and cruise ships offer discounts on space because they have exploding assets. You have to sell through capacity in order operate profitably or at least at cost. If they could, they'd just not fly the plane or cast off if they didn't make enough revenue to cover the fixed cost of the service. Sure you could price discriminate, but if it's a drug that might save your life, your elasticity of demand is going to look very inelastic.

Published: January 29, 2009 2:09 PM
Walt D.

Jeff

While I am no fan of IP, particularly when it is granted for trivial improvements to non-original ideas in software or trivial modifications in drugs, I'm not convinced that drug patents stifle innovation. There is no reason why a socialist (totalitarian) system such as the old Soviet Union, that had the technology and intellectual talent to put men into space and develop designer military viruses, could not have developed viagra. Given that they did not have the expensive process of FDA clinical trials, why was there no significant drug developments of any type?

Also, in the US, many of the smaller drug companies are funded by venture capital. These funds are currently drying up. With no patents, they would not even have been funded. Even with patents, do you expect the companies and employees to work for nothing, when the funding dries up, for the benefit of humanity.

Published: January 29, 2009 2:11 PM
Stephan Kinsella

Jeff, great point about businessmen who use market-oriented skills to get a product to market, and then, after becoming a market leader, getting confused and thinking IP is the reason for his success and becoming more IP-monopolistic in their attempts to suppress competition.
This reminds, of course, of the Adam Smith quote:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.

I used to hate this quote--it is often trotted out, sans the last sentence, but unthinking advocates of state antitrust laws. But the statement is correct: businessmen unfortunately too often use the state to suppress competition; and it is also true that the state should not outlaw private cartels, collusion, monopolization--but it should not facilitate it (by granting IP monopolies) or make it more necessary (by impoverishing businesses by its policies, making people more desperate and thus willing to act unethically to make profit; or by having to play the game (lobbying, building patent warchests for defensive purposes) to survive).

(On IP as monopolies, see my posts The Schizo Feds: Patent Monopolies and the FTC and IP vs. Antitrust.)

Published: January 29, 2009 2:17 PM
Martin OB

Mr. Tucker, I'm glad you changed your mind on this topic, and I commend your honesty for giving credit to the authors of the book which most helped to convince you. Of course, there's no contradiction in being anti-IP and giving credit where credit is due. It doesn't mean either that one doesn't want innovation to be somehow rewarded. IMO, a patent-free economy would shift from a paradigm of "get all the details right, then patent" to a paradigm of "be the first to announce the basic idea, let others fill in the details and take the risks, then enjoy the recognition", that is, a lower reward for a lower effort than is the case today.
In general, rather than (or besides) insisting on the many nasty effects of intellectual monopoly, it would be interesting to discuss in more detail the ins and outs of a modern, IP-free economy.

More on topic, here's another nice example of the patent system promoting innovation:

http://www.osnews.com/story/20861/Apple_Granted_Patent_on_Multitouch_Gestures_More

Published: January 29, 2009 2:31 PM
Walt D.

Stephan

I remember the first time I visited the mansions in Newport, Rhode Island, that were built at the end of the 19th century. What struck me most was not the size of these summer houses (60,000 sq ft for a house that was occupied on 6 weeks a year), but how the owners had amassed such wealth in order to afford them - many had exclusive business contracts with the Federal Government.

If patents and copyrights are a problem, then they are part of a bigger problem of successful businesses lobbying Congress to grant them privileges, or impose impediments on the competition. Perhaps Congress should be required to do the same as PBS and be required to disclose - "This Bankruptcy Legislation has been written and funded by MBNA".

Published: January 29, 2009 2:42 PM
ktibuk

Why don't you address the calculation problem instead of these assertions without any proof?

Authors of the book probably have never heard of Mises and his calculation argument but I hope you guys have.

Again, if there wont be private property when it comes to IP how will the market allocate the time of the producers, which is a scarce resource?

Published: January 29, 2009 3:22 PM
saku

What calculation problem? The ideas you're referring to are not a unit of account and there is no physical resource to be allocated that needs to be calculated. So how can a calculation problem occur?

Has the calculation problem occurred in propagation of fire, the wheel or even the many languages of this planet, which are freely open for anyone to learn and use?

Published: January 29, 2009 4:53 PM
Silas Barta

@saku:What calculation problem? The ideas you're referring to are not a unit of account and there is no physical resource to be allocated that needs to be calculated. So how can a calculation problem occur?

I thought ktibuk made it clear: it doesn't matter that ideas are non-physical. Producing new ones *does* require consumption of physical resources, like labor, raw materials, and capital goods. So, if there is no property in the ideas, how do I know how much the market values them? How do I know whether it's a good idea to hire two engineers, 3 computers, and 1500 sq ft of office space to producing it?

Think about it.

Published: January 29, 2009 5:07 PM
Andras

@Silas,
I sent you a comment to your blog. Have you found it?

Published: January 29, 2009 5:11 PM
Silas Barta

@Andras: Yes, I did! Thanks for commenting. I'll reply to it soon.

Published: January 29, 2009 5:15 PM
Martin OB

I think the reason for ktibuk bringing up the subject of "the calculation problem" is his contention that anti-IP people are "IP socialists". The calculation problem is an argument against the viability of a socialist economy. If all property has the same owner (the State) then there are no prices, so there's no possible calculation of costs and benefits, ie no economic calculation, so there's no way to determine numerically which form of allocation of scarce means is the most efficient.

Since ideas are not resources, they are not subject to scarcity, there's no question of how to allocate them and no economic calculation problem regarding ideas qua ideas.

Mental effort OTOH is a kind of labor, that is, a particular use of the scarce resource that is the human body (particularly the brain).

Each person's brain belongs to this person, so there is indeed a market where mental labor can be integrated in a cost-benefit estimation, and there's no more of a calculation problem about how to allocate mental effort than there is about how to allocate physical effort.

In order to emphasize that IP opposers are nothing like "IP socialists" let's consider what a true "IP socialist" would think.

Socialism is, roughly speaking, an economic system where all property belongs to the State. So, a precondition to be an IP-socialist is to believe that there is indeed such a thing as intellectual property, and that it should belong to the State. Since the physical translation of so-called "Intellectual property" is the legal monopoly on the activity of producing and transmitting certain patterns of information, an IP-socialist believes that whoever comes up with an invention or an artistic creation, a legal monopoly on this new idea should be automatically granted to government officials, who would take care of this newfound property. Nothing remotely similar to the anti-IP position.

Published: January 29, 2009 6:27 PM
Max Zorin

Silas, I have to quibble with your logic. You're saying that we need a market to determine how to many resources we need to input in order to come up with an idea - something that does not exist yet. In other words, we need a market so as to be able to allocate things that the public does not know exist, and cannot put a value on.

Think of this in real-world terms. How can an entrepreneur be expected to know how many engineers, computers, offices, etc. he needs to produce something that does not exist yet? If ideas are indeed unique (and therefore worthy of patent protection), then producing them cannot ever be a predictable, measurable, quantifiable process.

To the extent that the production of previously-unknown things CAN be predicted and quantified, those things really aren't "previously-unknown." It involves merely switching a few I's to O's and manufacturing a different variation of the same algorithm.

While I'm skeptical about the idea of abolishing all intellectual property, I certainly don't see any utility or justification for patents as providing a way to measure the production of heretofore undiscovered "things."

Published: January 29, 2009 6:56 PM
Inquisitor

"Why don't you address the calculation problem instead of these assertions without any proof?"

Perhaps because it applies to, oh, I don't know, scarce resources, for which economization is actually necessary?

"I thought ktibuk made it clear: it doesn't matter that ideas are non-physical."

It does. If the thing can be reproduced at no cost, infinitely, it is not scarce, and need not be economized. So stop spewing ignorant nonsense.

"Producing new ones *does* require consumption of physical resources,"

Na und?

"like labor, raw materials, and capital goods."

THOSE are scarce and require economization. I breathe when I take any action. Does it then follow air is a scarce good? Get real. I can reproduce an idea by mere thought. There is no need to economize, then. Beyond those scarce goods, for which property rights obtain, there is no point to property rights, given that they apply (I repeat this for paedagogical purposes) to goods which are not scarce, hence in need of economization. Unlike, ideas. All you've shown is that the discovery process of ideas includes scarce resources. So what? Once it's discovered its reproduction is in principle unlimited.

"So, if there is no property in the ideas, how do I know how much the market values them? How do I know whether it's a good idea to hire two engineers, 3 computers, and 1500 sq ft of office space to producing it?"

See whether they're willing to buy the end product. If not, then there's no point into the expenditures involved. The "idea" certainly is not in need of economization, because it is, oh wonders!, non-scarce. Hence, the calculation argument DOES NOT apply to it, as Mises himself realized. Only semi-morons extend the argument to non-scarce resources.

Incorrigible imbecile.

Published: January 29, 2009 8:00 PM
Inquisitor

which are scarce*

Published: January 29, 2009 8:02 PM
Andras

@Max Zorin
"To the extent that the production of previously-unknown things CAN be predicted and quantified, those things really aren't "previously-unknown." It involves merely switching a few I's to O's and manufacturing a different variation of the same algorithm."
Just read the original entry. Fighting AIDS is hardly solved by switching a few 1's to 0's. It is not the idea what is planned but a solution to the problem, preferably the best solution. Plan is concieved, resources are dedicated to reach this solution. When this plan is successful the result is the idea which is new, progressive and practical, the reason that it can be patented, according to current IP law. At the creation of this idea it was absolute scarce, i.e., unique, Fortunately it is not black magic so it is understandable to the layman. And since he could some of them wants more than just to have access to it through the market but also a claim that it is his (then he comes up with an anti-IP ideology to rationalize his grab). What is this if not socialism:
"From each according to his ability, to each according to his need".

Published: January 29, 2009 8:09 PM
Silas Barta

Okay, let's try this again. Could someone respond to the "IP calculation problem argument" without defining the problem away? Remember, classifying ideas as "not economic goods" does not tell me how an entrepreneur estimates how much of any given resource he should sink in to discovering an intellectual work (invention, book, etc.).

Published: January 29, 2009 10:06 PM
jeffrey

How do entrepreneurs know how much to invest before going to market? Umm, that's what entrepreneurs function. It's not a science; it's an art, ratified by the price system.

Silas, you know, your line of argument could be used for any economic good. If we don't have a monopoly on bacon, why would anyone produce it? If we don't have an exclusive privilege for making clocks, why would anyone bother keeping time? If we don't have competitive restrictions on tin, why would anyone bother with investing in it? And so on. these defenses of IP are indistinguishable from the usual defenses of mercantilism.

Published: January 29, 2009 10:34 PM
Silas Barta

Before I forget:

@Stephan_Kinsella: Give it up with that poll already. It's no different from going up to a bunch of bums and asking them, "Would you give up all of your property rights if it meant you could loot people with impunity?" No **** people who haven't produced anything aren't going to value the rights in what they've produced! Is this what passes for insight here?

@jeffrey: How do entrepreneurs know how much to invest before going to market? Umm, that's what entrepreneurs function. It's not a science; it's an art, ratified by the price system.

Yes, and the question is, how does the price guide entrepreneurs in terms of "idea production"? How does an idea's greater value get reflected in a higher price that an entrepreneur can see and compare to the cost of the inputs needed to produce it?

Silas, you know, your line of argument could be used for any economic good.

Yes, but you have to draw the parallel carefully and identify the relevant monopoly. Watch:

f we don't have a monopoly on bacon, why would anyone produce it?

We do have a monopoly on bacon! Everyone has a monopoly on (property rights in) the bacon they own. I am allowed to viciously prevent others from selling my bacon. Horrors!

So, when I see people bidding higher prices for bacon, I can look at the input costs and decide to make more. Or I can see that the inputs are too expensive and risky and decide not to make bacon. That is what entrepreneurs do, that is how prices contain information, that is how demand translates into supply.

When I produce bacon, but it is price-controlled at $0, that puts a kink in things. All information reflecting social preference for bacon is deleted. Sure, I can bundle the bacon with other goods, but the price signal is still massively distorted, and I have yet to see a libertarian argue that price controls are harmless "because you can just bundle it with something else and charge for a related good".

And so on. these defenses of IP are indistinguishable from the usual defenses of mercantilism.

You mean, you can't distinguish them. I can do it just fine. Watch: if the monopolist had never existed, tin could still be produced and used. If the inventor of a new idea had never existed, ______.

Published: January 29, 2009 10:56 PM
JackSkylark

Silas Barta,
I think its great you are bringing up the concept of economic calculation. I have been arguing the same thing for a couple of days on the Forums here and it's nice to see someone giving a Misesian based defense of IP.

Published: January 29, 2009 11:34 PM
ktibuk

I too have to hand it to Silas. I also can understand Mises better, and actually feel a little sorry for Rothbard because fighting against socialism on ethical grounds is so very hard and frustrating.

It is just a more efficient way to use the calculation argument and get

a. No reponse

b. A response that shows the responder has no clue when it comes to Mises' calculation argument, thus economics.

Published: January 30, 2009 1:44 AM
Peter Surda

@Silas, ktibuk
Your repeating the economic calculation issue shows that you do not understand intellectual property. You appear to be assuming that the lack of intellectual property means lack of any rights whatsoever regarding immaterial goods, or in other words, it means their "socialisation", "nationalisation", "expropriation", etc. This is incorrect. While IP indeed are rights related to immaterial goods, they are very specific rights. There are other rights that apply to immaterial goods and protect them. They are granted by laws that have nothing to do with IP per se.

In my upcoming paper I am trying to explain this in more detail and conclude that IP is neither required in order to create contracts regarding immaterial goods and to prosecute violators of these contracts, nor is it required for markets with immaterial goods to exist.

Finally, either of you have yet managed to explain how is it possible that I have been earning money as a software engineer for many years without recourse to IP. If you are correct than I should have been broke all that time.

Cheers,
Peter

Published: January 30, 2009 5:51 AM
Drake

@ktibuk

I seem to recall that the price of the factors of production is determined by the price of the final product. By determining the value that innovation adds (in productivity, profits, etc.) to a company, one may then price the factors that produced that innovation.

Published: January 30, 2009 6:11 AM
ktibuk

Peter,

You never seem to get the problem with this IP thing. I suggest you try to understand the issue before trying to comment on it let alone write a paper.

We are arguing against people who want to abolish all rights associated with IP.

They want to abolish all the patent system, copyright system and trade mark system.

If they get their way there will certainly be a calculation problem because the price of IP will be zero in the market.

Published: January 30, 2009 6:47 AM
ktibuk

"By determining the value that innovation adds (in productivity, profits, etc.) to a company, one may then price the factors that produced that innovation."

How exactly are you going to determine that, with out price signals?

Yes you may bundle IP with some tangible good but as long as IP can not have separate price there can not be differentiation between the tangible goods properties.

Imagine two books using identical physical goods. Same quality and number of pages, same quality binding, same ink. One is a Harry Potter novel, the other is a book by Kinsella arguing for the socialization of property.

What would set these two books apart when it comes to price in a free market? The demand difference of the IP that is embedded in them.

If there would be no laws that protect private intellectual property on the other hand, the two books would cost the same as consumer goods.

This means there would be no way to know on which subject should the authors allocate their time because there wouldn't be any price signals.

Should the scarce resources be allocated towards production of novels like Harry Potter, or should they be allocated towards books on IP Socialism? Or better yet, should people use their time and other resources to produce songs and movies instead of novels and treatises on socialism?

Who knows?

And that is the problem.

Published: January 30, 2009 6:59 AM
Peter Surda

@ktibuk
> You never seem to get the problem with this IP thing.
Funny, I think the same of you.

> I suggest you try to understand the issue before trying to
> comment on it let alone write a paper.
I assure you I have tried really hard for a long time. I used to be an IP proponent just a few years back, and as a software engineer, I deal with IP all the time.

> We are arguing against people who want to abolish all
> rights associated with IP.
That's not correct. You appear to argue against people who want to abolish all rights associated with immaterial goods. IP and rights on immaterial goods are not the same thing. IP is much more specific. As far as I see, there are no no-rights-on-immaterial-goods people in these debates on mises.org. Certainly I never claimed that.

> They want to abolish all the patent system, copyright
> system and trade mark system.
I am happy to inform you that my paper deals with all those three (trade secrets too). Again, I conclude that all the immaterial goods underlying them receive certain rights from non-IP laws already, and they are sufficient for both contracts and markets to work. In fact, I refuse to call trademarks IP, because all the relevant rights related to them are defined by non IP laws already.

The issue is therefore not whether there should be rights to protect immaterial goods. I don't see anyone here objecting to that. Rather, it is the qualitative features of these rights which are in question.

Cheers,
Peter

Published: January 30, 2009 7:27 AM
Joe B

ktibuk et al,

I addressed the calculation problem on one of the earlier posts (http://blog.mises.org/archives/009288.asp), although you may not have seen my last comment there.

An idea is a non-scarce, infinitely durable capital good. It is used solely to produce physical goods (including services), some of which can in turn be used to reproduce the idea, making it accessible to the owners of those physical goods (and in some cases also to anyone who can see or use the good regardless of ownership).

An idea can be protected (preventing others from using it) by contract and physical property rights alone, since it must be manifested in a physical good (even if that good is a conversation) to be disseminated. This protection comes with a cost just as it does with physical property.

There is a market mechanism for implementation of ideas just as there is with any other entrepreneurial endeavor. It's a transient market. You start out with a monopoly because you are the only one who initially has the right resources in place to bring a new good to market. Eventually others see the profits you are making and they invest resources to take a piece of your pie. Prices may drop, but you have made your profit by being the first to put the good into buyers' hands. Mises calls this entrepreneurial profit (or just plain "profit").

If the price of the good falls below the cost of your expenditure to continue producing it, you will stop producing it. Calculation is still occurring, it's just that the result is "If I want to make more profit, I need to innovate." Maybe this means finding another good that can be produced using the same idea, or developing a new idea altogether.

If you have not recouped your initial investment (Mises calls this "Loss"), that will affect your decisions on how to best apply your present resources. Maybe you will decide that additional protection in the form of restricted use contracts with your buyers is worth the cost of potentially fewer sales in order to preserve your monopoly for a longer period of time.

Read Mises' "Profit and Loss", and substitute the word "inventor" for "entrepreneur". Both are expending resources up front in hopes of a profitable temporary monopoly that may never materialize, or that may be lost to competition before they have recouped their development costs. I would argue that they are in fact the identical person, in the identical situation, putting different capital goods to work.

Should an entrepreneurs' idea to develop a new market be protected as IP? Should every entrepreneur have a guaranteed monopoly for an arbitrarily defined period of time? This doesn't sound like a free market to me.

To everyone who says that patents are the only thing keeping small businesses alive:
I work for a small, privately owned tech company that holds no patents because my boss hates lawyers. We have been a leader in our market for over 30 years, and are regarded by many in this market as consistently being the most innovative (my boss received a lifetime innovation award at our international industry conference last year). Our competition consists of large, publicly traded companies, or spinoffs bankrolled by large companies.

What's our secret? There are two - we serve a highly specialized niche market and - most importantly - we are CONSTANTLY innovating. This is the advantage that small businesses have over big business - flexibility, low overhead, quick decision making, and specialization. If we were unable to get our products to market more quickly than our competitors, we would struggle. But that would be our problem - and that is our incentive.

We don't need patents as incentive for innovation - Mises' concept of profit provides plenty of that as the market continually changes. We also don't need patents to make a profit, because by the time our competitors catch up, we're on to the next product. Our customers benefit from this and pay us accordingly.

I don't see why people on a free market blog even care about big business vs. small business. If the big business gets the product to market first, the consumers benefit and the big business is rewarded. If they have "stolen" the idea from a small business (or from another big business) then the victim should rethink their policies about protecting trade secrets. There will always be niche markets that small businesses can develop before the big boys catch on - this is Entrepreneurship 101. If the small business can't meet the market's needs, the big boys will step in.

Inventors who think they can come up with a better mousetrap and retire early on royalties are likely not offering much to a free market, and would be paid accordingly. The market does not care how long it took you to perfect the design, just as it does not care how much an entrepreneur spent to build his production line. If your product is desirable, you may make a profit.

If the bulk of the value is intangible and easily copied, you may consider requiring each investor and customer to agree to a non-disclosure or copyright agreement before selling to them. This is your choice as a producer, and every producer has this choice based on their expectations of the market. IP rights are not required.

Published: January 30, 2009 7:40 AM
Peter Surda

@Joe B
Very well argued, as your other posts are too.

Cheers,
Peter

Published: January 30, 2009 7:56 AM
Silas Barta

@Joe_B: An idea can be protected (preventing others from using it) by contract and physical property rights alone

Well, there's the crucial flaw: no it can't. It's possible for someone to copy ideas without violating any IP-protection contract, no matter what it says, because it can't bind third parties; and, without violating or purchasing the relevant property rights.

Your post is analogous to saying that physical property rights can be protected by physical possession rights, i.e. that "who ever currently holds it is the owner" can ensure that "whoever homesteaded it or bought it is the owner". Obviously, it can't, because the owner by the second definition need not be the owner by the first definition (e.g. thieves).

There is a market mechanism for implementation of ideas just as there is with any other entrepreneurial endeavor. It's a transient market. You start out with a monopoly because you are the only one who initially has the right resources in place to bring a new good to market.

Sure, and you could just the same say that there is a market mechanism for production in the absence of physical property rights: just sell all you can before it gets stolen! That's still going to eliminate 99% of worthwhile production, even if you can point to a successful operation here and there.

So yes, for some ideas, the social preference is small enough to be recognizable in the price signal of that transient profit -- but not anywhere close to all. And ideas are only going to get *more* copyable, not less.

Read Mises' "Profit and Loss", and substitute the word "inventor" for "entrepreneur". Both are expending resources up front in hopes of a profitable temporary monopoly that may never materialize, or that may be lost to competition before they have recouped their development costs.

And what you may have missed in reading Mises is that the magnitude of the profit is itself a function of the surrounding legal regime -- exactly the question under discussion. I could likewise say that people "should" stop producing lumber, "because" its price is zero, ignoring the fact that it's zero because the overlord is currently looting stockpiles and giving them away.

Published: January 30, 2009 8:31 AM
ktibuk

Peter said, "As far as I see, there are no no-rights-on-immaterial-goods people in these debates on mises.org."

See that is the problem you are not seeing as far as you can. Go read Kinsellas essay which all IP socialist here base their rejection of IP on this site.

You may have a completely different approach but the main argument here is not what you think it is, and unless you present your idea, getting in between people who argue about completely different things confuses the process.

Published: January 30, 2009 8:57 AM
Peter Surda

@Silas
We can define the following two rights:
- the right to use a good according to one's wishes
- the right to prevent third parties from doing so

For goods that are rival, or to put it in Joe B's terms, non-durable, as material goods are, these cannot be applied separately. However, if a good is non-rival/infinitely durable, these rights can be applied separately to a different effect.

I hope that we can at least agree on that.

Now, as I argue in my upcoming paper, the first right is sufficient for both contracts and markets to work correctly. IP does not deal with the first right at all, it implicitly assumes it already exists. It is the result of other, non-IP, laws. IP only deals with the second right. We can obviously argue whether that is "good" or "bad". However, necessary it is not.

I hope that we can also agree that one does not have the "right" to a value of a good. That is the labour theory of value all over again.

Cheers,
Peter

Published: January 30, 2009 8:58 AM
ktibuk

Joe B,

You are not addressing the calculation issue at all. All you are doing is throwing around economics concepts and Mises' name loosely and that is it.

Calculation argument follows a chain of reasoning. It is about how property rights make exchange possible and then from that point how prices form and signal what needs to be produced. Without those signals there can not be any "entrepreneurial endeavor".

"Constantly innovating" means constantly producing and if you knew about economics, you would know that the problem is not "to constantly produce or not", but "what to produce and how much to produce given scarce factors of production".

Taking away property rights, and ordering people to "produce constantly" did no work in the soviet union and it wont work in a world where IP is socialized.

Published: January 30, 2009 9:05 AM
Drake

@Joe B

"Future ideas are scarce - they require labor, time, possibly capital to develop. This is where the calculation takes place. Someone who needs a problem solved will trade resources to someone who they think is capable of solving that problem.

Once the problem is solved, the customer has received his solution, and the innovator has received his payment. The idea is no longer scarce - neither the innovator nor his customer lose anything if a third party copies that idea.

The fact that many current business models are built around the notion that the idea continues to be scarce doesn't magically redefine the completed idea as a scarce good. These models aren't collapsing because technology has made the ideas less scarce; they collapse because technology is quickly revealing that they were never scarce to begin with."

Well said. You've provided ktibuk with more than enough information to quell any fears he may have about markets without IM. That being said, I'll throw my two cents in as well.

@ktibuk

"there would be no way to know on which subject should the authors allocate their time because there wouldn't be any price signals."

Unfortunately, you have made the most elementary of errors. You have forgotten about demand. Assuming that the supply of two books is the same and the demand is different, we should expect to see a higher price for the more highly demanded book and a lower price for the less highly demanded book.

Perhaps your response will be, "But they will just print more of the popular book and less of the unpopular book, equalizing prices."

The question you have neglected to ask yourself is, "Which book will make the publisher more money: the unpopular book or the popular book?" The more books the publisher sells, the more money they make, and the more they can pay their authors. Is that not the signal you have been searching for?

Published: January 30, 2009 9:09 AM
Silas Barta

@Peter_Surda: No, I still can't agree with anything there. As I've argued before, you can only claim that there is "no rivalry" by defining away the existing rivalries. If you claim that a conflict over the use of an idea "doesn't count as rivalry", then sure, there's no rivalry. But that's begging the question. I could, just the same, define away your desire for food and claim that you have no right to stop me from eating your food since your food isn't scarce. See, I want it, and your wanting of your food somehow doesn't count.

When someone claims to own IP, they are claiming the right to instantiate an idea, and to stop others from doing the same. Like with physical property rights, not everyone can be satisfied. For you to claim, then, that there is an implicit assumption of existence of the right to use physical goods in contravention of IP, is again just begging the question.

You can see my point far more clearly when it comes to radio waves. I could take your exact same arguments and claim it's an infringment of my property rights to tell me I can't form MY radio waves with MY transmitter into "your" frequency.

Published: January 30, 2009 9:12 AM
ktibuk

Drake,

I don't know where you get the idea that I "forgot" demand, but my post was based on the importance of the demand.

The only way two physically identical books would be valued differently is demand, and the only thing that creates the difference in demand is the IP, the content.

If you make the content, the IP, worth zero by removing private property rights, this means you take away the only signal that allocates the scarce resources need to produce them.

I don't know how much clearer I can get.

Published: January 30, 2009 9:24 AM
Drake

@ktibuk

If you don't take some time to fully consider (not just read) what I've written, this won't be much of a discussion now, will it? ;)

Published: January 30, 2009 9:30 AM
ktibuk

Also

Drake said,

"Assuming that the supply of two books is the same and the demand is different, we should expect to see a higher price for the more highly demanded book and a lower price for the less highly demanded book."

This is the crux of the matter. In a IPless world, there would be no difference between the prices of books highly demanded and books that aren't demanded at all.

That is because what makes them apart is taken out of the equation by making the price of IP "zero", I am assuming all the physical qualities are the same of course

Published: January 30, 2009 9:32 AM
Silas Barta

@Drake: You have forgotten about demand. Assuming that the supply of two books is the same and the demand is different, we should expect to see a higher price for the more highly demanded book and a lower price for the less highly demanded book. ... The more books the publisher sells, the more money they make, and the more they can pay their authors.

Not true. All we can say is that:

a) People will pay *something* -- probably cost of production plus standard profit margins -- for non-gibberish books, and

b) People won't buy gibberish books.

So, yes, the book's content does influence even the non-IP-regime price -- but only in the sense that people won't buy outright gibberish. The thing is, the price of the non-gibberish books will *not* increase with the value of the informational content, since anyone can produce them and producers will minimize prices. For the same reason, the publisher *can't* pay more to the authors of more popular books, since they have to compete with publishers who charge just enough to cover production and standard profit.

At best, the publisher actually affiliated with the author will have an advantage on the first run, before everyone else knows it's worthwhile to print, and before individuals can download and run off their own copy. Still:

1) That effectively puts a price cap on intellectual works, with all the attendant harms of price caps, and

2) Again, ease of duplication is only going to get easier. Hanging your hopes for intellecutal work profitability on remaining technological barriers, is a futile endeavor indeed, and implicitly recognizes the need for potentially-unbounded (but finite) profit on the production of intellectual works that coincides with their social valuation.

***

Note that all I've done here is restate the standard case for IP. It could be wrong, but you would have to address these arguments specifically, which you haven't done.

By the way, how come Jeffrey_Tucker never wonders about the Unseen costs of intellecutal works that don't get produced because their potential producers expect too little of the market for that work will respect their IP? Hmm...

Published: January 30, 2009 9:33 AM
ktibuk

@ Drake,

Right back at ya.

Published: January 30, 2009 9:34 AM
Mike

"This is the crux of the matter. In a IPless world, there would be no difference between the prices of books highly demanded and books that aren't demanded at all.

That is because what makes them apart is taken out of the equation by making the price of IP "zero", I am assuming all the physical qualities are the same of course"

Even in our current environment, there are no patents on things like, say, new business models. And yet firms are constantly refining their method of doing business. Why is that, since other firms could easily copy the new model and render any competitive advantage null?

I think you underestimate the market advantage of being the first to implement an idea.

Published: January 30, 2009 9:51 AM
Deefburger

The problem with patenting and protecting ideas lies entirely in the fact that they are non-physical and that they are never entirely unique.

Take music for example. Musicians face this problem every time they compose a new tune. It is not possible for any musician to compose a score that does not contain any prior art. It's not that the tune may contain portions that are the same as portions written prior. The problem with the composition being unique lies in the prior art LEARNED by the composer PRIOR to his new composition.

This is not to say the the piece in it's entirety is not unique, it may be, but that the uniqueness of it cannot be determined by subtracting that which is NOT unique.

This is true for all accdemic thought. Unless one grew up in complete isolation, without exposure to any other ideas, one cannot have an original thought, not entirely. Yet the patent system dissects the thought down to those components that are unique expressions of thought, which, taken by themselves would be meaningless without the support of the prior art.

If the thought is non-physical, yet originates in the physical medium of a brain, then the thought is the product of that brain. Yet, the brain itself is built upon the prior art of the DNA that coded for that body. Should the thought actually be a unique expression of the functioning of that brain, it can be construed that the possibility exist that the thought itself was pre-conceived, carried in the DNA of the individual. We know this is not so. So the only alternative is to assume that the thought is entirely non-physical.

If the thought is non-physical, then it cannot be proved, one way or the other WHERE it came from. We cannot know. We know it came from our selves, somewhat, but not the actual origin. As a non-physical phenomenon, it has no discernible origin.

The thought itself may actually occur simultaneously in many minds.

If this is so, then how can we truly protect the idea? We cannot. And attempts to use the state to do so will ultimately stifle the expression of thought for fear of retaliation.

It is only in the EXPRESSION of the thought that we can claim any originality. And for that, we can only say we thought of it, and then describe the thought. We cannot truly claim temporal right, for we have no means of truly knowing if this is true. Some one else may have thought the thought before and didn't express it, or at least did not express it openly (See above post on submarine patents), or the thought may have occured to others prior and was expressed in a different language or in a different use of the same language.

The only provable uniqueness of any thought is in the expression, not the thought itself. So, the only truly patentable property of any thought is the expression itself. But what good is the expression when it's the thought itself that has the value? The expression has no value in and of itself other than the transmission of the thought.

But the actual thought cannot be transmitted in it's entirety because the brain that thought of it is unique! Only a cursory description of the thought may be expressed, in a medium that is not a carrier of thought itself.

And if the transmission is successful, by any measure, then the brain(s) that recieved it, now possess it too, and the the thought is demonstrably not unique any longer by the very act of successful expression!

Therefore, credit for having expressed a thought may be due, especially if the thought is well expressed, ie. clearly and concisely, but the thought itself belongs to no one and everyone at the same time.

Look at the music industry today. It is a microcosm of the problems facing the other industries that rely on patent and copyright. DRM has failed to protect the thought from free re-expression. Yet the artists that are giving away their recordings are making money on the EXPRESSION of the music that they themselves are capable of UNIQUELY supplying. They are making their money on the performances! It's not the music that is being sold online, it is the TRANSMISSION from a known original source and a known original content.

Now concider the ideas of drugs or technology. Again, it is not the ideas of them that have value in the market but the expression of them, as PRODUCTS that has value. So what is the point of trying to protect others from knowing your idea? Is it possible that not keeping the secret thought might cost a company more? Look at the drug companies. If the researchers could talk to each other, the new products might actually reach market sooner rather than later, because the ideas can be shared and new knowledge passed between research efforts, like the academics do in the other sciences. It's the creation of efficient production processes, and distribution and sales, not the research that generate profits. I'm not saying research is less valuable, just that it is more valuable if it is shared, because the cost of it is then spread across many minds and possible methods.

Published: January 30, 2009 9:55 AM
Peter Surda

@Silas
> As I've argued before, you can only claim that there
> is "no rivalry" by defining away the existing rivalries.
I define non-rival good thus: if a consumption of a good does not decrease it's supply, the good is non-rival. It has a very specific meaning. It does not mean that there is no conflict, or noone gets angry. I may get angry when you insult me, it may decrease the market value of my honour, but not many libertarians seem to claim that it is a violation of a right.

This explanation should satisfy also your counterexamples of instantiation and radio waves.

@ ktibuk
> Go read Kinsellas essay which all IP socialist here base
> their rejection of IP on this site.
I just read it (not wholly, but the relevant parts). At no point did I see Mr. Kinsella advocating the abolishing of contract rights. Rather, he said that they are insufficient to validate IP. His goals in argumentation were different from mine; he seems to be arguing that IP cannot be deduced, and is therefore invalid. I do not agree with his arguments regarding scarcity. But he correctly described all the main forms of IP (being an IP lawyer, probably has more experience with them than me), and correctly identified that their purpose is to apply to parties outside of contracts.

My goal, at least for now, is more limited than this. I merely want to show that IP is not necessary for contracts and markets on immaterial goods.

So maybe it is you who is jumping to conclusions?

Cheers,
Peter

Published: January 30, 2009 10:00 AM
Joe B

Silas:"It's possible for someone to copy ideas without violating any IP-protection contract, no matter what it says, because it can't bind third parties; and, without violating or purchasing the relevant property rights."

I agree. But it's also possible to refrain from selling your product until your customer signs a contract restricting them from taking actions that would reveal the idea to a third party. While this could be costly, it is the cost of exclusivity. It's also costly to hire security guards to protect your factory 24/7 ensuring that you alone can control its use.

Purely private protection of both ideas and physical property along these lines may have an effect on the decisions made by entrepreneurs/inventors, but it doesn't preclude a market. It would probably result in more incremental innovation, meaning that fewer resources were required upfront to introduce a new idea. Of course, this would result from loosening of IP protection anyways.

I'm assuming a pure free market in my reasoning, and I'm not even assuming that physical property rights alone are doing their job. This passes all protection costs to the property owner. So "sell all before it gets stolen" becomes "factor in the cost of protection". And the legal regime is non-existent. I apologize if this may not reflect the Austrian view 100%, but I don't see why I should pay taxes to protect someone else's property. Someone has to pay for protection.

ktibuk,
Yeah, I get it. Your assumption is that profits will generally fall quickly enough that every innovation would result in a loss. I see this more as a challenge for business models than a universal truth. Again, if you fear copying, you will be willing to pay more to protect against it.

We are constantly innovating in response to our market. When our competitors catch up to our last innovation, we know that we need a new one ready to stay ahead of them, and this is decided based on the market needs. We don't just sit around arbitrarily brainstorming for the sake of quantity.

I'm also not proposing taking away property rights in the sense that socialists do. This would mean forcing everybody to share every idea they have in a big idea pool. My argument is simply that, like with physical property, if you want to prevent others from using it, you need to accept the cost of protection.

Published: January 30, 2009 10:13 AM
Peter Surda

> I'm also not proposing taking away property rights in the
> sense that socialists do.
I would go even further and say that noone here is advocating that. The IP plantation masters were just assuming that.

Published: January 30, 2009 10:48 AM
ktibuk

Joe B,

"My argument is simply that, like with physical property, if you want to prevent others from using it, you need to accept the cost of protection."

I am not disputing the fact that the cost of protection of IP should fall on the owner.

I also know that no matter how much you spend on protection not all IP can in fact be protected.

But these are technical issues. The main issue about IP is an ethical one.

Should the producers of IP own their own production or do anyone who can copy is entitled to the IP.

Or

Will there a be an ethical difference between the rights of someone who creates something, and rights of someone who just copies it.

And the point that no one can really create and idea form nothing, is irrelevant because it is also true that no one can really create a tangible good out of nothing.

Whats important is ideas don't float around in the universe, they are homesteaded by people.

Published: January 30, 2009 10:55 AM
ktibuk

Mike said,

"Even in our current environment, there are no patents on things like, say, new business models. And yet firms are constantly refining their method of doing business. Why is that, since other firms could easily copy the new model and render any competitive advantage null?

I think you underestimate the market advantage of being the first to implement an idea."

All you are saying is that

"Yes you can not have private property and own anything, but you always have your labor. Your past labor can not be saved through appropriation of property but if you work hard enough you wont see the difference."

Leaving aside the fairness of this, this situation can only happen in a primitive society where no division of labor exists as Mises showed.

And relating to IP, there would be no division of labor when it comes to creating IP. There may be lots of performers (because at least you dont want to socialize labor) but no one that produces just songs, novels, software, etc.

Published: January 30, 2009 11:04 AM
Mike

"Yes you can not have private property and own anything, but you always have your labor. Your past labor can not be saved through appropriation of property but if you work hard enough you wont see the difference."

Huh. Must be easy to refute someone's argument when you go ahead and redefine it like that. I feel like there's a word for that...

Let's go back a step. Do you think business models should be ownable things? Are all factories ripping off Henry Ford's IP? Hell, someone was the first person to think of the division of labor. All capitalists must be thieves!

Published: January 30, 2009 11:20 AM
Drake

@ktibuk

In that case, let's try again :) Taking into account your condition that all books be manufactured at the same cost and sold at the same price, I will illustrate the direct causal link between the DEMAND for a particular intellectual product and the PRICE SIGNAL the producer of the intellectual product receives. If you see any flaws in the causal chain I present, please point them out to me (I have labeled each causal link for your convenience).

ktibuk said:

"...there would be no way to know on which subject should the authors allocate their time because there wouldn't be any price signals."

1. All else being equal, authors want to make more, rather than less, money.

2. This will lead them to write things that can be sold for more, rather than less, money.

3. Publishers will pay more money for manuscripts that will result in higher profits.

4. Assuming that all books in the universe are manufactured at the same cost and sold at the same price, publishers will make higher total profits by selling more books.

5. Publishers will sell more books by offering books for which there is a higher demand.

Working in the opposite direction:

A) The more people there are that want to buy a certain kind of book, the more books of that kind will be sold.

B) The more books of that kind are sold, the more money the sellers of that kind of book will make.

C) The more money the sellers of that kind of book make, the more money will be paid to the writers of that kind of book.

(Assuming that the prices of all books are the same actually STRENGTHENS this line of reasoning.)

And finally, if more people love fiction than non-fiction, more people will be inclined to buy fiction books than non-fiction books. This means that publishers will sell more fiction books than non-fiction books. This means that they will make more money (in total) selling fiction books than non-fiction books. This will lead them to PAY MORE (think: price signal) for the production of fiction manuscripts as apposed to non-fiction manuscripts. This means that authors will make more money writing fiction than non-fiction.

(Again, this assumes - as you do - that the manufacturing cost and sale price of every book is the same.)

Published: January 30, 2009 11:24 AM
Peter Surda

@ktibuk
> But these are technical issues. The main issue about IP
> is an ethical one.
Before the question of ethics I would highly recommend to consider the question of logic.

> Should the producers of IP own their own production or
> do anyone who can copy is entitled to the IP.
First you need to define what property on non-rival goods means. Otherwise arguments have multiple meanings and confuse everyone.

Does property mean:
- a right to consume a good according to one's wish, or
- a right to exclude third parties from consuming a good according to their wishes?

With non-rival goods, these definitions have different effects, which means they need to be considered separately.

More details in my upcoming paper.

Published: January 30, 2009 11:38 AM
Andras

Peter Surda: "Does property mean:
- a right to consume a good according to one's wish, or
- a right to exclude third parties from consuming a good according to their wishes?"

Thus, the circle has been closed again.

Mises mentions this problem in Human Action, Scholar Edition, p657. "It is beyond the scope of catallactics to enter into an examination of the arguments brought forward for and against the institution of copyrights and patents. It has merely to stress the point that this is a problem of delimitation of property rights and that with the abolition of patents and copyrights authors and inventors would for the most part be producers of external economies."
(This later part, as far as I know, conveniently left out from Kinsella's book.) It worths reading all.
This was a dichotomy Mises tellingly rather avoided. Interestingly, he did not say that IP is worthless!

The real question then: Do we want to force it to be part of only external economies again. By the way, being external also means failure to calculate!

Published: January 30, 2009 12:56 PM
Jeffrey Tucker

Mises didn't think too much about the topic. But his own model shows that the external economies are only in the long run following the dissipation of internal economies - the same as with other entrepreneurial profits.

Published: January 30, 2009 1:01 PM
Andras

@Jeffrey Tucker,
"Mises didn't think too much about the topic."

I don't know why did you say this! He thought much enough to see that catallactics could not answer it.
He said the same for predicting the future including foretelling marketmovements. Is that a reason to say he had not thought about that?
Could you elaborate on your second sentence? I could not cacth it.
Regards,
Andras

Published: January 30, 2009 1:44 PM
Stephan Kinsella

Silas: "@Stephan_Kinsella: Give it up with that poll already. It's no different from going up to a bunch of bums and asking them, "Would you give up all of your property rights if it meant you could loot people with impunity?" No **** people who haven't produced anything aren't going to value the rights in what they've produced! Is this what passes for insight here?"

Like, say, Intel? ("Intel's CEO spoke for many when he said he would be glad to cut patents to a tenth of its current rate provided that others did the same.")

Published: January 30, 2009 4:18 PM
Stephan Kinsella

As I noted in Against Intellectual Property (n. 38), "Mises expressed no opinion on the issue, merely drawing the economic implications from the presence or absence of such laws."

Here are Mises's words:

The External Economies of Intellectual Creation

The extreme case of external economies is shown in the "production" of the intellectual groundwork of every kind of processing and constructing. The characteristic mark of formulas, i.e., the mental devices directing the technological procedures, is the inexhaustibility of the services they render. These services are consequently not scarce, and there is no need to economize their employment. Those considerations that resulted in the establishment of the institution of private ownership of economic goods did not refer to them. They remained outside the sphere of private property not because they are immaterial, intangible, and impalpable, but because their serviceableness cannot be exhausted.

People began to realize only later that this state of affairs has its drawbacks too. It places the producers of such formulas--especially the inventors of technological procedures and authors and composers--in a peculiar position. They are burdened with the cost of production, while the services of the product they have created can be gratuitously enjoyed by everybody. What they produce is for them entirely or almost entirely external economies.

If there are neither copyrights nor patents, the inventors and authors are in the position of an entrepreneur. They have a temporary advantage as against other people. As they start sooner in utilizing their invention or their manuscript themselves or in making it available for use to other people (manufacturers or publishers), they have the chance to earn profits in the time interval until everybody can likewise utilize it. As soon as the invention or the content of the book are publicly known, they become "free goods" and the inventor or author has only his glory.

The problem involved has nothing to do with the activities of the creative genius. These pioneers and originators of things unheard of do not produce and work in the sense in which these terms are employed in dealing with the affairs of other people. They do not let themselves be influenced by the response their work meets on the part of their contemporaries. They do not wait for encouragement.[13]

It is different with the broad class of professional intellectuals whose services society cannot do without. We may disregard the problem of second-rate authors of poems, fiction, and plays and second-rate composers and need not inquire whether it would be a serious disadvantage for mankind to lack the products of their efforts. But it is obvious that handing down knowledge to the rising generation and [p. 662] familiarizing the acting individuals with the amount of knowledge they need for the realization of their plans require textbooks, manuals, handbooks, and other nonfiction works. It is unlikely that people would undertake the laborious task of writing such publications if everyone were free to reproduce them. This is still more manifest in the field of technological invention and discovery. The extensive experimentation necessary for such achievements is often very expensive. It is very probable that technological progress would be seriously retarded if, for the inventor and for those who defray the expenses incurred by his experimentation, the results obtained were nothing but external economies.

Patents and copyrights are results of the legal evolution of the last centuries. Their place in the traditional body of property rights is still controversial. People look askance at them and deem them irregular. They are considered privileges, a vestige of the rudimentary period of their evolution when legal protection was accorded to authors and investors only by virtue of an exceptional privilege granted by the authorities. They are suspect, as they are lucrative only if they make it possible to sell at monopoly prices. [14]. Moreover, the fairness of patent laws is contested on the ground that they reward only those who put the finishing touch leading to practical utilization of achievements of many predecessors. these precursors go empty-handed although their main contribution to the final result was often much more weighty than that of the patentee.

It is beyond the scope of catallactics to enter into an examination of the arguments brought forward for and against the institution of copyrights and patents. It has merely to stress the point that this is a problem of delimitation of property rights and that with the abolition of patents and copyrights authors and inventors would for the most part be producers of external economies.

and here:

The Creative Genius

Far above the millions that come and pass away tower the pioneers, the men whose deeds and ideas cut out new paths for mankind. For the pioneering genius [12] to create is the essence of life. To live means for him to create.

The activities of these prodigious men cannot be fully subsumed under the praxeological concept of labor. They are not labor because they are for the genius not means, but ends in themselves. He lives in creating and inventing. For him there is not leisure, only intermissions of temporary sterility and frustration. His incentive is not the desire to bring about a result, but the act of producing it. The accomplishment gratifies him neither mediately nor immediately. It does not gratify him mediately because his fellow men at best are unconcerned about it, more often even greet it with taunts, sneers, and persecution. Many a genius could have used his gifts to render his life agreeable and joyful; he did not even consider such a possibility and chose the thorny path without hesitation. The genius wants to accomplish what he considers his mission, even if he knows that he moves toward his own disaster.

Neither does the genius derive immediate gratification from his creative activities. Creating is for him agony and torment, a ceaseless excruciating struggle against internal and external obstacles; it consumes and crushes him. The Austrian poet Grillparzer has depicted this in a touching poem "Farewell to Gastein." [13] We may assume that in writing it he thought not only of his own sorrows and tribulations but also of the greater sufferings of a much greater man, of Beethoven, whose fate resembled his own and whom he understood, through devoted affection and sympathetic appreciation, better than any other of his contemporaries. Nietzsche compared himself to the flame that insatiably consumes and destroys itself.[14] Such agonies are phenomena which have nothing in common with the connotations generally attached to the notions of work and labor, production and success, breadwinning and enjoyment of life.

The achievements of the creative innovator, his thoughts and theories, his poems, paintings, and compositions, cannot be classified praxeologically as products of labor. They are not the outcome of [p. 140] the employment of labor which could have been devoted to the production of other amenities for the "production" of a masterpiece of philosophy, art, or literature. Thinkers, poets, and artists are sometimes unfit to accomplish any other work. At any rate, the time and toil which they devote to creative activities are not withheld from employment for other purposes. Conditions may sometimes doom to sterility a man who would have had the power to bring forth things unheard of; they may leave him no alternative other than to die from starvation or to use all his forces in the struggle for mere physical survival. But if the genius succeeds in achieving his goals, nobody but himself pays the "costs" incurred. Goethe was perhaps in some respects hampered by his functions at the court of Weimar. But certainly he would not have accomplished more in his official duties as minister of state, theater manager, and administrator of mines if he had not written his plays, poems, and novels.

and here:

The special conditions and circumstances required for the emergence of monopoly prices and their catallactic features are:
...
11. The monopolized good by whose partial withholding from the market the monopoly prices are made to prevail can be either a good of the lowest order or a good of a higher order, a factor of production. It may consist in the control of the technological knowledge required for production, the "recipe." Such recipes are as a rule free goods as their ability to produce definite effects is unlimited. They can become economic goods only if they are monopolized and their use is restricted. Any price paid for the services rendered by a recipe is always a monopoly price. It is immaterial whether the restriction of a recipe's use is made possible by institutional conditions--such as patents and copyright laws--or by the fact that a formula is kept secret and other people fail to guess it.

The complementary factor of production the monopolization of which can result in the establishment of monopoly prices may also consist in a man's opportunity to make his cooperation in the production of a good known to consumers who attribute to this cooperation a special significance. This opportunity may be given either by the nature of the commodities or services in question or by institutional provisions such as protection of trademarks. The reasons why the consumers value the contribution of a man or a firm so highly are manifold. They may be: special confidence placed on the individual or firm concerned on account of previous experience[15]; merely baseless prejudice or error; snobbishness; magic or metaphysical prepossessions whose groundlessness is ridiculed by more reasonable people. A drug marked by a trademark may not differ in its chemical structure and its physiological efficacy from other compounds not marked with the same label. However, if the buyers attach a special significance to this label and are ready to pay higher prices for the [p. 365] product marked with it, the seller can, provided the configuration of demand is propitious, reap monopoly prices.

The monopoly which enables the monopolist to restrict the amount offered without counteraction on the part of other people can consist in the greater productivity of a factor which he has at his disposal as against the lower productivity of the corresponding factor at the disposal of his potential competitors. If the margin between the higher productivity of his supply of the monopolized factor and that of his potential competitors is broad enough for the emergence of a monopoly price, a situation results which we may call margin monopoly[16].

...
In the long run such a national cartel cannot preserve its monopolistic position if entrance into its branch of production is free to newcomers. The monopolized factor the services of which the cartel restricts (as far as the domestic market is concerned) for the sake of monopoly prices is a geographical condition which can easily be duplicated by every new investor who establishes a new plant within the borders of Atlantis. Under modern industrial conditions, the characteristic feature of which is steady technological progress, the latest plant will as a rule be more efficient than the older plants and produce at lower average costs. The incentive to prospective newcomers is therefore twofold. It consists not only in the monopoly gain of the cartel members, but also in the possibility of outstripping them by lower costs of production.

Here again institutions come to the aid of the old firms that form the cartel. The patents give them a legal monopoly which nobody may infringe. Of course, only some of their production processes may be protected by patents. But a competitor who is prevented from resorting to these processes and to the production of the articles concerned may be handicapped in such a serious way that he cannot consider entrance into the field of the cartelized industry.

The owner of a patent enjoys a legal monopoly which, other conditions being propitious, can be used for the attainment of monopoly prices. Beyond the field covered by the patent itself a patent may render auxiliary services in the establishment and preservation of margin monopoly where the primary institutional conditions for the emergence of such a monopoly prevail.

and here:

Another popular fallacy refers to the alleged suppression of useful patents. A patent is a legal monopoly granted for a limited number of years to the inventor of a new contrivance. At this point we are not concerned with the question whether or not it is a good policy to grant such exclusive privileges to inventors.[14] We have to deal only with the assertion that "big business" misuses the patent system to withhold from the public benefits it could derive from technological improvement.

In granting a patent to an inventor the authorities do not investigate the invention's economic significance. They are concerned merely with the priority of the idea and limit their examination to technological problems. They deal with the same impartial scrupulousness with an invention which revolutionizes a whole industry and with some trifling gadget, the uselessness of which is obvious. Thus patent protection is provided to a vast number of quite worthless inventions. Their authors are ready to overrate the importance of their contribution to the progress of technological knowledge and build exaggerated hopes upon the material gain it could bring them. Disappointed, they grumble about the absurdity of an economic system that deprives the people of the benefit of technological progress.

and here:

The convincing power of the productivity argument is in fact so irresistible that the advocates of socialism were forced to abandon their old tactics and to resort to new methods. They are eager to divert attention from the productivity issue by throwing into relief the monopoly problem. All contemporary socialist manifestoes expatiate on monopoly power. Statesmen and professors try to outdo one another in depicting the evils of monopoly. Our age is called the age of monopoly capitalism. The foremost argument advanced today in favor of socialism is the reference to monopoly.

Now, it is true that the emergence of monopoly prices (not of monopoly as such without monopoly prices) creates a discrepancy between the interests of the monopolist and those of the consumers. The monopolist does not employ the monopolized good according to the wishes of the consumers. As far as there are monopoly prices, the interests of the monopolists take precedence over those of the public and the democracy of the market is restricted. with regard to monopoly prices there is not harmony, but conflict of interests.

It is possible to contest these statements with regard to the monopoly prices received in the sale of articles under patents and copyrights. One may argue that in the absence of patent and copyright legislation these books, compositions, and technological innovations would never have come into existence. The public pays monopoly prices for things it would not have enjoyed at all under competitive prices. However, we may fairly disregard this issue. It has little to do with the great monopoly controversy of our day. When people deal with the evils of monopoly, they imply that there prevails within the unhampered [p. 681] market economy a general and inevitable tendency toward the substitution of monopoly prices for competitive prices. This is, they say, a characteristic mark of "mature" or "late" capitalism. Whatever conditions may have been in the earlier stages of capitalist evolution and whatever one may think about the validity of the classical economists' statements concerning the harmony of the rightly understood interests, today there is no longer any question of such a harmony.

Published: January 31, 2009 12:20 AM
ktibuk

Kinsella said,

"As I noted in Against Intellectual Property (n. 38), "Mises expressed no opinion on the issue, merely drawing the economic implications from the presence or absence of such laws."

This is a misrepresentation. You are implying that Mises handled tangible property and IP differently. Which is wrong. Mises expressed lots of opinions about property (including IP) and they are all about economics implications.

Published: January 31, 2009 7:09 AM
ktibuk

Drake,

"1. All else being equal, authors want to make more, rather than less, money."

True.

"2. This will lead them to write things that can be sold for more, rather than less, money."

Now hold right there. This is the crux of the matter as I am desperately trying to explain. This wouldnt be true in a IPless world, because the only differences between many books would be their physical quality not the content. The content would be free.

Even if the author would get paid initially this is actually an advance and no price signals are involved. Since there is no connection left between the author and his work, authors wouldn't care if their works are sold or not. They will never ever get paid again on that work.

The only people that would care about the content is the publishers. But their cost for content is zero. They don't need to pay the author, they can just copy the work. They dont have to pay the author relaying information regarding market demand.

So the chain of price signals is broken. And there lies the problem.

Published: January 31, 2009 7:19 AM
Jeffrey Tucker

this is just wrong. and obviously.

Authors want their books to sell so they can enjoy a larger up front payment on their next book.

This was common in the 19th century. British authors made more from selling their manuscripts into the public domain in U.S. markets than they made from Royalties in Britain. This is a documented fact. Indeed, the US market provided a main inspiration for them to write. It also led to huge speaking fees in the US.

Markets really do work. Down with stupid central plans!

Published: January 31, 2009 7:24 AM
ktibuk

Jeffrey.

There was no piracy back then because copying wasn't this easy. And if there was a natural way to protect IP. there wouldn't be any need to personally protect property.

This is like owning a house on a remote mountain that no one would go and claim you never needed actual property rights.

And in an age where copying is this easy the advance that any publisher would extend would only be for a very short ahead time, and this wouldn't relay public demand information on the content.

Published: January 31, 2009 7:59 AM
Joe B

So does the Mises store make any profits on the books that are also available for free download?

Do some of these books sell better than others?

Do the less successful books tend to have their prices lowered over time?

Is there any correlation between number of downloads and sales quantities for given books?

When I download a book and print it myself on A4, it is a different good than a binded book sold in the store. Rothbard's "For a New Liberty" in book form is a different good than Marx's "Das Kapital".

While the end served by the downloaded and binded books may be the same, they are different means with different costs to me and to the producer. It's the difference between buying an axe and spending time to make one myself, assuming the resources are available.

The download costs me almost nothing, and also costs Mises.org almost nothing. Mises.org has an end in this transaction along the lines of promoting their cause, just as I have an end in learning about it. While obviously not every author would have this end in mind, there are additional non-financial ends to be met from these transactions.

Technologies such as e-ink and OLED displays will probably make traditional publishers obsolete within the next couple of decades. This will give authors more direct control over their content, enabling them to choose what sort of DRM or copyright agreement, if any, they want to use. They won't get payments from publishers, so they will have to find new ways of leveraging their writing into sellable goods.

Maybe the profits generated from a writing would not be directly correlated to the quantity of copies sold (or copied). This could provide a different means of valuing the idea itself, like a software designer who is contracted to create a specific application for one customer's particular need. But this is just speculation about possible business models - only time and the market would reveal which models work.

Maybe you guys are right and new content will become so scarce that consumers would voluntarily agree to an IP protection scheme to promote new content creation. This would likely be a less expensive way for creators to protect their ideas, even if people who haven't agreed to this scheme can still access and pirate their ideas.

Property rights are regarded as ethical because they are a less expensive way of allocating scarce resources than constant battles. But there are plenty of people out there who don't agree with the Austrian definition of property rights. I personally regard these other views such as socialism as ethically wrong because they inevitably result in unsustainable systems and are often logically self-contradictory. If socialism could deliver on its promises then I might consider it - but I know that it can't.

I think that Austrians tend to take for granted that unallocated land belongs to nobody. Socialists would say that it belongs to everybody, statists would say it belongs to the state, and environmentalists would probably say that the land owns itself. The ethics of each of these views could be deduced accordingly, and would be radically different from each other even if all of the other components of property rights were the same.

I obviously agree with the Austrian view, but this is mainly because the alternatives are either ridiculous, unworkable, or conflict with my strongest held belief in personal liberty. If this makes me some sort of utilitarian, then so be it. I don't see any of the views mentioned above as self-evident, so this means that an external set of ethics is needed to choose the right one. I choose whatever results in continually increasing prosperity and personal liberty.

I see physical property rights as necessary for a successful civilization, therefore they are just. I don't yet see the need for specific IP rights, but if I ever got sick of Seinfeld reruns I might consider paying into some system to promote new content creation - either with financial donations or by voluntarily giving up certain liberties.

But I thought this post was about patents? I guess copyright is a trickier bastard than patents due to the ease of copying content - so it always becomes the primary battlefield.

Published: January 31, 2009 10:04 AM
Drake

@ktibuk

Your argument rests on the assumption that the producer of an "intellectual creation" (to use Mises' phrase) does not possess a competitive advantage sufficient to justify their investment. However, Mises has already addressed this issue:

"[Inventors and authors] have a temporary advantage as against other people. As they start sooner in utilizing their invention or their manuscript themselves or in making it available for use to other people (manufacturers or publishers), they have the chance to earn profits in the time interval until everybody can likewise utilize it. As soon as the invention or the content of the book are publicly known, they become 'free goods' and the inventor or author has only his glory."

Conspicuously absent from the above quote was any mention of the impossibility of economic calculation without copyright. To the contrary:

Mises stated that the services rendered by intellectual creations are "not scarce, and [therefore] there is no need to economize their employment. Those considerations that resulted in the establishment of the institution of private ownership of economic goods did not refer to them. They remained outside the sphere of private property not because they are immaterial, intangible, and impalpable, but because their serviceableness cannot be exhausted."

[My thanks to Mr. Kinsella for providing the original quotes.]

Published: January 31, 2009 10:31 AM
Drake

@Joe B

"I guess copyright is a trickier bastard than patents due to the ease of copying content"

It's tricky, but not insurmountable. Consider the points of control held by the producer of an original work. They can control:

1) IF they will produce or not,

2) WHAT they will produce,

3) WHEN production will begin and end,

4) WHERE, HOW, and WITH WHOM they will produce,

5) and WHEN and in WHAT MANNER they will release their product.

These five points of control are incontestably held by producers of original works. They are clearly not susceptible to the affects of copying, but have yet to be widely exploited in business models. The key is for the producer of original works to sell control of the above five points to the consumers of their works.

1) Raise a minimum in pledges before agreeing to produce something.

2) Have a bidding war to decide what exactly to produce.

3) The production schedule can also be determined by the amount of money coming in at any given time.

4) The specifics of production (location, contributors, collaborators, etc.) can also be chosen through bidding.

5) Once the product has been completed samples may be released for free. Then the full product may be withheld until a minimum number of pledges is received. In addition, a premium could be paid by those who wish to be the first to receive the product. This could be accompanied by scarce goods or services (memorabilia, private visits with the producer, etc.).

Happily, some of these points of control are already part of successful business models:

http://www.artistshare.com/home/default.aspx

Published: January 31, 2009 11:17 AM
Martin OB

Very nice initiative, only a quibble:

"Here at artistShare it is our goal to put the "art" back into the word artist. Our PATENT PENDING PROCESS allows fans to experience an artist's project from its conception to its fruition. Through ArtistShare, artist projects become a unique and rewarding experience for the fan."

So much for promoting non-IP-based business models :/

Published: January 31, 2009 1:37 PM
Drake

It's not perfect, but it's a good start. The main point I take from it is that they are selling something non-copyable: direct access to the artist's creative process. For example:

"Welcome to the Haydn and Dvorak Project on ArtistShare. As a participant in this project you will have a front row seat as we explore the creative process behind the St Lawrence String Quartet and the making of this exciting new recording. The Haydn and Dvorak project also provides the unique opportunity for fans to play a vital role in the creation of new music by the [Quartet]. Premium participant offers include credit listing on the final album!"

Attending recordings, participating in the creative process, and being listed in the credits of the album are all non-copyable which makes them crucial aspects of a 21st century business model.

Published: January 31, 2009 8:01 PM

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